A payday loan (also called a
paycheck advance or payday advance) is exactly as it sounds... a small,
short-term loan that is intended to cover a borrower's expenses until his or
her next payday.
Payday loans are only set up to
cover the borrower until they receive the next paycheck from their job. It is
typically only for a short term period of 7 to 14 days before payment in full
is due. Legislation & Laws regarding payday loans can vary widely between
different states and even different cities within a state.
There are some states and
jurisdictions impose strict usury limits and limit the amount of interest a
payday lender can charge. Some jurisdictions outlaw payday loans all together.
Then some have very few restrictions on payday lenders.
Due to the extremely short-term
nature of payday loans, the interest and APR can seem very extreme when
compared to a traditional personal or signature loan that is normally spread
out over a year or more.
In very simple terms for each $100
borrowed a typical payday loan could cost anywhere between $15, $20, $25 to as
much as $35 depending on the company. So if you borrow $100 dollars today you
are required to pay $115 dollars or as much as $135 dollars two weeks from
today. This is why it is good to shop around and compare companies.
Loan Stores: Borrowers visit a
payday loan store and secure a small cash loan, with payment due in full at the
borrower's next paycheck (usually a two week term). The borrower writes a
postdated check to the lender in the full amount of the loan plus fees. On the
maturity date, the borrower is expected to return to the store to repay the
loan in person, and the check is handed back. If the borrower doesn't repay the
loan in person, the lender may process the check traditionally or through
electronic withdrawal from the borrower's checking account.
If the account is short on funds to
cover the check, the borrower may now face a bounced check fee from their bank
in addition to the costs of the loan, and the loan may incur additional fees
and/or an increased interest rate as a result of the failure to pay. For
customers who cannot pay back the loan when due, it is always best to contact
the payday loan company as soon as possible to workout an extension to keep
from depositing the check.
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